Question 3 (19 Marks) a) Dunbar Corporation has bonds on the market with 10.5 years to maturity, an annual YTM of 10%, and a current price of R860. What must the coupon rate be on Dunbar's bonds? (3 marks) b) Jane's Pizzeria issued 10-year bonds one year ago at a coupon rate of 8.75 %. If the YTM on these bonds is 7.25%, what is the current bond price? (3 marks) c) XYZ Company has a 9% annual YTM bond outstanding on the market with 12 years to maturity and an option to call within 5 years. The call premium is R100. What is the yield to call (YTC) for this bond if the callable bond value is 120% of par value? (4 marks) d) Under what conditions will a bond's coupon rate be larger than its current yield? (2 marks) e) Explain why the yields on short term bonds fluctuate more than the yields on long term bonds, and yet the prices of long term bonds nevertheless fluctuate more than the prices of short term bonds. (3 marks) f) Assume that 4 year bonds are currently yielding 7% and 3 year bonds are yielding 6%. Using the expectations theory, what is the implied yield for 1 year bonds starting 3 years from now? (4 marks) 5